Analysis of Coca-Cola (KO:NYQ)

It's been more than six years since I last told you about a classic dividend grower, also a favorite of W. Buffett: Coca-Cola. So, at the request of a loyal reader, I decided to unsheathe my analyst's glasses once again to review this nugget I parted with just over a year ago. Coca-Cola is quite simply the world's largest manufacturer and distributor of soft drinks. The American giant is also in the news this holiday season, since it's thanks to (or because of) him that Santa Claus is red!

Valuation & dividend

Like most American titles at the moment, KO is overpriced. In fact, that's what prompted me to part with it, with great pain, in 2017. Unlike other stocks, Coca-Cola has not been impacted by the recent market downturn. Admittedly, this proves KO's defensive nature, which is explained by its type of business and is reflected in a beta of just 0.6 and minimal volatility of 5.25%. Nevertheless, this resilience doesn't help Coca to return to more correct valuation levels, as it trades at :

• 44.17 times current recurring earnings
• 30.62 times average recurring earnings
• 481.97 times (!) tangible assets
• 12.31 times book value
• 5.93 times sales
• 38.69 times current free cash flow
• 29.07 times average free cash flow

Not only is it very expensive, but a price/sales ratio of over 3 is generally a reliable signal to sell. EBIT and EBITDA only amount to 4.2% of the enterprise value. This confirms Coca-Cola's excessive valuation at the moment.

If we focus on the dividend, we might paradoxically think we're dealing with a stock that's been neglected by the market. KO's yield is almost 3%, not bad at all for a quality company these days. Coca is also one of the famous Dogs of the Dow, the ten Dow Jones stocks with the highest dividend yields. However, as I've said over and over again, this indicator is not enough on its own; you have to look behind the figures. Coca-Cola's dividend represents :

• 130,72% current recurring earnings
• 90,60% average recurring earnings
• 114,49% current free cash flow
• 86.06% average free cash flow

Coca's earnings per share have been falling for several years now, which explains why we end up with figures like these, while the dividend has been rising for the past... 55 years. Future dividend growth is therefore called into question. In fact, over the last five years, payouts have increased by an average of just 4.2% per annum. Given the historical sustainability of the dividend, I believe that the American giant will find solutions to stop the hemorrhaging of its earnings, so as not to have to lower its payouts. Nevertheless, we can't expect the dividend to rise much in the next few years.

Balance sheet & result

Dividends are rising a little, profits are falling, cash reserves are increasing very little, and asset values are tending to erode slowly over the long term. Coca-Cola has undeniably struggled to create shareholder value in recent years. This has not prevented the stock from rising by 25% over the last five years, and even more than doubling over the last ten years. Admittedly, the subprime crisis helped the stock to catch up, but there has undeniably been speculation in KO for some time now, since the share price no longer follows the trend in fundamentals.

Cash reserves are adequate, with a current ratio of 1.34 (up slightly) and a quick ratio of 1.25. Gross margin is very good, at 62.6% (up), for a free cash flow margin of 15.34% and a net margin of 13.43%. Although down, profitability is on a par with margins, with ROA of 5.41%, CFROA of 8.08% and ROE of 27.86%. These two aspects are obviously KO's great strength, and one that W. Buffett particularly appreciates. Buffett. And let's not forget that the American giant is not very capital-intensive, which is another characteristic of franchises.

That said, the Coca-Cola of today is not the Coca-Cola of the 90s. Other notable elements of companies with a competitive advantage include overheads, goodwill and debt. Coca's share of overheads is quite high, at 60.2%, and goodwill is down. The ratio of long-term debt to assets climbs to 35.48% (up). Total debt, which has also been rising for many years, represents 2.79 times shareholders' equity, which is obviously a lot. It would take Coca 6.6 years to pay off all its debt using its average free cash flow. That's a long time, without being catastrophic, and it's mainly thanks to the American giant's excellent predisposition for generating cash. Without this, the company would undeniably have some problems.

An interesting aspect of KO is that, in addition to increasing its dividend every year, the company also buys back its shares, thereby reducing the number of shares in circulation and increasing each shareholder's share of the pie. This also goes some way to explaining why the stock continues to climb, despite rather mediocre fundamentals. Nevertheless, one might question the wisdom of buying back one's own shares when they are so expensive... it's akin to speculating on one's own future.

Conclusion

Coca-Cola is certainly no longer as attractive an investment as it was in the 90s or 2008, but it's still a great company with very comfortable margins. Its defensive qualities are also invaluable during periods of stock market turmoil. Even if its fundamentals aren't great and its debt is high, KO remains financially solid. This is confirmed by the Z-Score (Altman), which is in the green zone at 3.5. The company isn't about to go bankrupt, but we suspected as much. The F-Score (Piotroski), at 6 out of 9, confirms these good predispositions.

But as you can see, it's the price that's really the problem for the American giant at the moment. Even if we take into account that Coca's book value is mostly intangible, and even if we say to ourselves that last year was exceptionally bad, the company would be at least twice as expensive. And here I'm being kind again, taking into account these extenuating circumstances, not necessarily justified.

So, to sum up, I still think this is a stock we should part with. The price/sales indicator alone should scare us away...